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Aereo’s big bet to break the TV industry: CEO Chet Kanojia explains

The digital age lets us consume media how and when we want, and in the format of our choosing. If we want to hear a song, for instance, we no longer have to wait for it on the radio or buy a CD stuffed with filler we don’t want to hear. The old content models have evolved except for one glaring exception: television.

The TV business is still based on an archaic business model that forces customers to buy arbitrary bundles of channels. Fans of arts programming, for instance, often have to shell out $5 a month for football shows — even if they hate football.

This isn’t a technology issue. It’s instead the problem of what media doyen Peter Kafka calls the “TV industrial complex” — a cabal of broadcasters and cable distributors that refuse to surrender their bundled TV business model.

That’s why upstart Aereo, which uses tiny antennas to stream TV signals to mobile devices, is so intriguing to watch. The company is offering a way for people to watch shows where and when they want — and has so far withstood the TV industry’s lawsuits. Yesterday, we showed off photos of Aereo’s tech. Today, we’re exploring the vision and strategy of the man who wants to kick in the door of the TV industrial complex once and for all.

The quest to end an “abusive” system

Chet Kanojia, who is speaking at paidContent Live in April, is a soft-spoken engineer who likes stylish shoes. At 43, he’s already built an advertising company, Navic Networks, and sold it to Microsoft(s msft) — and presumably made himself a fortune. When we chatted at Aereo’s site in Brooklyn this week, the first thing I wanted to know is why he picked this fight. Why, that is, did he decide put so much energy into Aereo when the TV industry might crush the company in a second like it has done to others before?

“I had the option to be a VC, to do nothing or to do something really really meaningful,” said Kanojia. “In my heart of hearts, I belive that when businesses are created or preserved with analogue mentalities, they’re artificially constrained and ripe to to be recast in a different way.”

He adds that he loves TV content like 60 Minutes, Parenthood and Downton Abbey. But he is exasperated by the TV industry’s ossified pricing model.

“Why can’t there be a simple way to pay for this? It’s just irrational that it should cost hundreds of dollars a month. It’s an abusive system set up in an artificial way.”

Broadcasters like NBC and Fox, of course, would argue that we need a system that provides revenue to produce the content that people like so much. In recent years, these networks have been leaning on distributors to pay them for carrying over-the-air channels — and presumably think Aereo should too.

Kanojia is having none of it, saying the broadcasters are already making money from public spectrum through advertising and that it’s unreasonable for them to ask for more. Also, Aereo is not part of the regulatory regime that requires big TV companies to offer their channels for sale to cable and satellite distributors; this means that, for now, Aereo is unable to sell channels like ESPN(s dis) (owned by ABC) to its customers.

Kanojia adds that pure “a la carte” TV is not the only solution to the TV muddle. He would also settle for “rational bundles.”

A high stakes bet

Aereo’s disruptive potential lies in the fact that, unlike other forms of pay TV, subscribers can add or drop it without the hassle of set-top boxes or contracts. For now, Aereo is available only in New York City but is about to roll out to 22 new markets across the country for the same price of $1 a day or $8 a month to watch and record shows. Kanojia believes this will change people’s conception of how we get access to television.

“You can come in five or ten times a year and a pay a dollar. We have lots of habitual one dollar buyers. It’s a massive dent in the psyche.”

For Aereo to have a long-term impact, though, it will still have to survive an ongoing legal gauntlet. On this front, it has a decent chance because investors and lawyers designed the company as a high-stakes bet, counting on a 2008 appeals court ruling that said private remote DVRs don’t violate copyright (you can read the legal details here). After broadcasters sued it last year, Aereo won the first round and the case is now on appeal.

The price tag for the loser will be high. On one hand, media mogul Barry Diller and others have put at least $58 million into Aereo, money that could evaporate if Aereo is shut down. On the other hand, GigaOM Pro analyst Paul Sweeting (who has written about Aereo) said the initial court decision was a “disaster” for the networks and that a loss at the appeal level will open the floodgates.

“If the networks don’t win, what it means is that all you have to do is bounce a signal off a cloud-based DVR and you can do what you want,” said Sweeting by phone.

Whatever the outcome of the court case (which could go to the Supreme Court if courts in New York and California continue to disagree), Kanojia thinks he will have made an inexorable dent in the current tv structure. He also thinks the litigation will help other pioneering TV companies.

“The legal situation is unfortunate, but it forces clarity and that’s a good thing.”

Why is it that broadcasters for decades made money without cable or satellite? Now they still charge advertisers and then started extracting fees from cab and sat in additon to cash from the advertisers. They will soon find it ok to charge us a fee to buy or use a rabbit ears antenna if we choose to drop cab and sat. It’s all about the expectation of unending exponential growth in revenue – thanks to Wall Street for that model. You would think they would be happy with just making a decent income but now it has to be more squared.

And let’s not forget that the programming which the public wants to watch, via any cheap means, is created by those same networks that Aereo is trying to unseat. If nobody will pay for programming (either through licensing or advertising) then it will cease to exist. It’s not just the legality of intelliectual property rights, its the cost of creating high-quality programming! Where do viewers (and Aereo) think these shows come from???

I feel all the passion folks, but the simple fact is that there are intellectual property laws protecting copyrighted material. It would appear that many of you are not familiar with the fact that content owners license their program assets to Operators, a.k.a. Broadcasters, Cablecasters, IPTVcasters, et.al.

These Operators obviously pay for the right to distribute programs to their viewers. These Operators may in some instances have the right to negotiate with other entities who want to retransmit that content to other viewers. For example, broadcastres have historically negotiated retransmission licenses with cablecasters so the latter can redistribute programs to cable subscribers. All of this is done based on rules and regulations embodied in copyright law.

If you as a viewer could acquire broadcast programs without Aereo, you’d have no need for this service now would you? If the signal is weak, you can go to Radio Shack and buy a better antenna, voila. Broadcasters have paid for the licenses that allow you as a private party to acquire and view that content. You can invite your friends and family over to view as well…no problem.

Do you want to resell the broadcasters programs — charge admission to your home to show the Super Bowl. No dice. If you want to resell the programming you can only do so by negotiating a license for that right. That’s what a bar or restaurant have to do.

Aereo is as a practical matter retransmitting programs without a license — by injesting the programming and retransmitting it to paying subscribers, they have become an Operator…not some sort of “virtual Radio Shack”. To claim that Aereo is doing the content owners/licensors a favor is like asseting that selling bootleg copies of DVD’s is going the owners/licensors a favor.

You folks need to get a grip. Aereo isn’t some flipping new age Robin Hood. We’re talking about intellectual property rights here folks. Get a grip.

“injesting the programming and retransmitting”. I think that’s the critical issue. If I setup a Slingbox for you here in New York connected to your own antenna and tuner and internet connection you wd control the chain of ownership. You pay me to keep YOUR television running. You should be able to watch it anywhere not just NYC. It’s yours. I never take possession. If Aereo is in fact ingesting and retransmitting, they are interrupting that chain of ownership. What the courts decide will be interesting.

Hats off to your efforts Chet Kanojia. No point in paying the networks for the $#%^& programming packages. Please liberate us. I desperately would like to see this in Boston and the nearby towns.I dreamed something like this long ago and you are fighting to make it real. Keep it up.

It is interesting that this Aereo situation is happening at the same time as broadcast TV is trying to get “mobile ATSC” off the ground. In case you haven’t been “tuned in” (pardon the pun) the new mobile tech requires broadcast TV stations to give up around 25% of their over-the-air bandwidth to make space for a signal that, at this moment, almost no devices can receive. And what sane person is going to want to graft a TV antenna onto their smartphone or iPod? In a very real way, Aereo *is* mobile ATSC, and the broadcasters don’t have to do a thing to get their signal out to all kinds of connected devices. I strongly suggest that the NAB start talking to Barry Diller to come to some agreement, because Aereo is doing them a big favor. I’m pretty sure they don’t see it that way, though.

The situation is akin to taking on Ma-Bell in the good old days before it faced real competition. And look where we are now, with competition. I honestly ask – Do you want to get back to dark old days of Bell monopoly? or would you much prefer the competition we see today.

If the answer is – Yes I want it to remain in the hands of the oligopoly of Networks and CableCos & DTH – then boy you will continue to pay increasing fees which is way above the inflation rates with no one to protect your limited discretionary dollars going in the pockets of the cozy oligopoly of Networks and CableCos & DTH.

Wake up guys! You are being fed drivel and have your hands tied behind you all thanks to the gutless FCC and the lobby-fed Washington. I salute the likes of NetFlix and Chet Kanojia’s Aereo along with Barry Diller who have the guts and the vision to take on the entrenched oligopoly.

Make a promise to yourself that you don’t need to pay for what you never wanted to watch anyway and let the TV Industrial complex charge you for it – it is legitimized daylight robbery.

Kanojia doesn’t like bulldozers – he thinks Caterpillar charges too much for them – so he’s placed himself in front of one that isn’t running. The driver yelled at him to get out of the way but Kanojia hasn’t moved. He has a shovel, he’s dug up a little dirt, and he says the shovel is better because it costs so much less than a bulldozer. If the driver ever starts up his machine we’ll see who can push harder, Kanojia with his shovel or the bulldozer.